China Debts Dwarf Official Data Prompting Alarms: Methodology

A taxi driver washes his vehicle on the bank of the Hai River across from the Conch Bay development in the Binhai area of Tianjin. Photographer: Sim Chi Yin/Bloomberg

Dec. 19 (Bloomberg) -- To find out about the debt of
China’s local government financing vehicles, Bloomberg News
examined disclosures made by them in publicly available Chinese-language prospectuses for bonds, notes and commercial paper.

The survey focused on 2011 issuances in an effort to
provide the most up-to-date snapshot. In all, there were 231
such issuers through Dec. 10, which raised a combined 354.1
billion yuan ($55.8 billion).

The documents offer a rare window into these companies’
borrowing and obligations because they all provide information
on “total liabilities” (负债合计). This is made up mostly of
bank borrowing and bond debt, though it also includes items such
as accounts payable and taxes due.

The tally of the issuers’ combined total liabilities comes
to 3.96 trillion yuan of debt. That’s more than three-quarters
of the 4.97 trillion yuan that the National Audit Office has
said was owed by 6,576 such borrowers at the end of last year.

Bloomberg News surveyed all of the companies that are
majority owned by local or provincial governments. They include
infrastructure companies; local state asset management companies;
expressway, ports, airports, and water companies; and
provincial-level railroad and energy companies.

Infrastructure Companies

When asked to define what it included, the audit office
said it counted debt that local governments have responsibility
to repay, that they have guaranteed, or other debts that they
may be liable for. It didn’t give more specific detail in an
e-mailed response to questions.

A key focus of the audit office’s June report was the debt
the government had responsibility to repay. At that time the
audit office estimated total local borrowing, including that by
local government financing vehicles, at 10.7 trillion yuan.

The audit office counted debt as of the end of 2010. By
contrast, the prospectuses vary widely in terms of when they
took their measure of total liabilities. Some issuers reported
total debt as of the end of 2009, while others did so for as
recently as Sept. 30, 2011. In each case, Bloomberg News took
the most recent data available.

Most of the 231 companies examined had subsidiaries. Some
of those subsidiaries may have also been considered as separate
financing vehicles by the National Audit Office.

Opaque Borrowers

Bloomberg found two instances -- one in Tianjin and one in
Guangdong province -- of companies listing as subsidiaries
entities that had sold bonds, notes or commercial paper this
year. The subsidiaries’ debt and lines of credit data were not
included in the tally to avoid double-counting.

Bloomberg’s survey covers many larger local government
financing companies, because they are generally the issuers of
bonds. However, the survey also excludes some of the larger ones
because they didn’t issue prospectuses this year. They include
Sichuan Development Holding Co. and Jiangsu Communications
Holding Co., each of which has previously reported debt of more
than 115 billion yuan when selling bonds.

Bloomberg also tallied borrowing on a bank-by-bank basis
for the 113 companies that provided that information. Such
disclosures are only made in prospectuses for medium-term notes
and commercial paper. The documents detail lines of credit (授信）
from banks and trust companies, specifying total lines of credit
given, the amount used, and the amount remaining.

A tally was also made of unused lines of credit the bank
had extended to them to show future potential borrowing.

Possible Repayments

It’s possible that some portion of the utilized lines of
credit may have already been paid off. Only one company among
the 113, Inner Mongolia Highway Investment Co., provided details
in tabular form showing repayment of loans. The company reported
that as of March 31 it had paid off 371 million yuan of a total
10.4 billion yuan in bank borrowing, or 3.6 percent.

The criteria Bloomberg used are similar to that of China
Construction Bank Corp. The firm said it included construction
and infrastructure companies, expressway companies, ports,
railways and airports in the 580 billion yuan of loans to local
government finance vehicles the Beijing-based lender reported as
of June 30. Some of its loans to these entities are also
extended to subsidized-home construction companies, it added.